Returning the State to Prosperity Requires Action

October 28, 2010

The dire state of California's labor market is emblematic of a dysfunctional economy, which explains in part the state's perennial deficit and bottom-rung bond rating. If California is interested in a robust, entrepreneurial economy that produces well-paying, stable jobs, two issues should be front and center: government spending and taxes, say Jason Clemens, the director of research at the Pacific Research Institute, and Julie Kaszton, a research fellow at the Pacific Research Institute.

Consider spending first.

State and local government spending in California represented 22.3 percent of the state's economy in 2008.

In other words, state and local government command more than 1 in 5 dollars in the state.

This ranks California as the 10th largest state and local government in the country.

That could be a reasonable bargain if it corresponded with the 10th best quality of services, but it doesn't, say Clemens and Kaszton.

California ranks 22nd when compared to 23 industrialized countries in terms of outcomes in areas like education, health care and infrastructure.

This corresponds with a performance score of 0.72, meaning California's government delivers only 72 percent of what it could (should) if it were providing services efficiently.

Making matters worse is that California's tax system relies inordinately on two of the most economically costly taxes: personal and corporate income taxes.

California's top personal income tax rate of 10.55 percent is third-highest in the country.

Its second-highest rate of 9.55 percent kicks in at $47,055, a relatively low level of income.

Only three states have higher rates than California's.

In addition, at a rate of 8.84 percent, California's corporate income tax is the 8th highest in the country.

Source: Jason Clemens and Julie Kaszton, "Returning the State to Prosperity Requires Action," San Francisco Examiner, October 21, 2010.